DIIS POLICY BRIEF
FRAGILE SITUATIONS
Fragility and natural resources
For donor countries, the challenge is to promote policies that enable fragile states to
make the best of their resource endowments without falling prey to resource conflicts or
authoritarianism.
September 2008
Poorly governed spaces in the developing world are increasingly attracting the attention of donor countries.
Paradoxically many of the world’s fragile states have
become dysfunctional, despite vast resource endowments. It is important to rethink the governance of
valuable resources, not only because this sometimes
leads to state fragility, but also because improved
resource management offers ways out of fragility and
towards economic growth and development.
This brief argues that problems with natural resource
governance are frequently associated with: 1) situations
of extreme state fragility where groups clash in violent
conflict over resources or in attempts to secede by a
resource-rich part of a country; or 2) lack of economic
development and the persistence of repressive regimes,
with little ability or desire to promote growth and welfare for their citizens.
For donor countries, this amounts to a challenge
when it comes to promoting policies that enable
fragile states to make the best of their resource endowments without falling prey to resource conflicts
or authoritarianism. A fine balance must be struck
to ensure that state strength, resource extraction and
economic growth positively reinforce each other,
rather than resulting in the two undesirable outcomes noted above.
A first step in designing policies that mitigate these
problems involves further scrutiny of the mechanisms
that link natural resources with adverse outcomes
for fragile states. Consequently, this brief first maps
the challenges geographically before describing the
paradox of how natural resources create dysfunctional
states. Based on this analysis, a series of policy recommendations will be made.
MAPPING DEPENDENCE ON NATURAL
RESOURCES
In several countries, including Angola, Chad, Nigeria
and Sudan, wealth in the form of natural resources
POLICY RECOMMENDATIONS
Resource wealth has been a curse for
many fragile states. To allow fragile
states to make the best of their resource endowments, donors should
work towards:
• Increased transparency in the oil, gas
and mining sector
• Improved local capacity for contract
negotiation and creation of natural
resource taxation schemes
• Better opportunities for companies
to make investments in risky environments
• Multilateral progress towards better market access for processed raw
materials from fragile states.
has spurred not economic growth, but corruption, repression and violent conflict. This so-called resource
curse affects many but certainly not all fragile states.
The risk of a state descending into resource-based
conflict or authoritarianism is highly correlated with
the degree of resource dependence. Table 1 offers
an overview of the resource dependence of selected
fragile states.
The table indicates that both fuel-producing and
mineral-rich fragile states can be highly dependent on
natural resource extraction. In some states half of all
economic activity revolves around resource extraction.
When it comes to exports, and hence the possibility
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DIIS POLICY BRIEF
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for attracting foreign currency, the degree of reliance is
often even higher.
In general, trade and economic data from fragile
states should be treated with care. For instance, some
fragile states fail to register as resource-dependent because of a lack not of resources, but of data and/or the
absence of a functioning economy. Chad, Liberia and
DRC are examples.
For donor countries, it is absolutely essential to
consider the importance of natural resources in the
economies of fragile states when creating policies to
enhance further economic development. Natural
resources are an important issue in connection with
state fragility because they highlight some avenues
into fragility and, equally importantly, a potential
route out of fragility, provided the inflow of capital
can be put to good use.
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NATURAL RESOURCE CONFLICTS
Fragile states are characterized by defective economies,
lack of social cohesion and the absence of effective and
responsive state institutions in all or parts of their territory. When these characteristics are combined with the
presence of valuable natural resources, the result often
becomes natural resource conflicts or the persistence of
authoritarian regimes.
Natural resources and state fragility combine to create
violent uprisings in cases where states are unable to extend
their own monopoly of violence to their entire territory.
When authority is absent or weak and the potential finan-
cial gains from controlling resource-rich areas loom large,
warlords or secessionist movements might feel tempted to
challenge the state. Warlordism has affected West Africa,
whereas secessionism has beleaguered resource-rich areas
in Nigeria (Biafra), DRC (Katanga), Indonesia (Aceh)
and Angola (Cabinda). Such uprisings have rarely succeeded in creating much political change, let alone new
states, but they have caused tremendous humanitarian
problems, while enriching only a few leaders. This is the
resource curse in its purest form. When states fail to uphold their monopoly of violence, internal conflicts makes
it impossible to ensure economic development and use
resource revenue to improve the livelihood of citizens.
LACK OF ECONOMIC DEVELOPMENT
AND THE PERSISTENCE OF REPRESSIVE
REGIMES
It is counterintuitive to think that presence of valuable
natural resources should lead to a lack of economic
development. Yet such natural riches frequently result
in poor economic performance and the persistence of
authoritarian political regimes.
Resource-rich fragile states owe their economic
difficulties to corruption, mismanagement and the
downward spiral or so-called Dutch Disease. The
latter entails appreciation of the resource-exporting
country’s currency and, in the case of fragile states,
significant difficulties in establishing viable industries
outside resource extraction. Failing to create economic
diversification and to develop industries that involve
the processing of natural resources, rather than merely
their extraction, hinders economic growth.
There is also a political aspect to these problems.
Resource-exporting states tend to become rentier states,
i.e. states that survive on rents rather than traditional
taxation of the population. Rents in this context are
derived from the sale of concessions, royalties and
corporate taxes, which create a political system void
of incentives to provide the basic education and health
care that allow citizens to add to the country’s economic development. At the same time, citizens have
little incentive to demand democratic representation in
exchange for taxes. The result is a complete absence of
mutually binding ties between political elites and the
general population.
Without reciprocity between political elites and
citizens, fragile rentier states become weak in terms of
welfare provision. They are, however, frequently strong
in terms of repressive power. This puzzling characteristic is caused by close and often opaque connections
between political elites and the extractive industry.
Political leaders rely on income from the extractive
industry to maintain the patron-client relationships
that allow them to stay in power. Hence authoritarian
regimes use resource rents to increase their repressive
power, thus prolonging their periods in office.
For donors, these linkages between natural resources
and adverse political and economical outcomes constitute a major challenge. Policies must promote a
balance in which fragile states become strong enough
to control their territories and provide a reasonable
level of services to their citizens without reaching the
other extreme of state strength being used to suppress
citizens and political opposition.
TARGETING POLICY INTERVENTIONS
Breaking the linkage between state fragility and
natural resources is a challenging and risky undertaking. Policies aimed to create growth based on natural
resource extraction run the risk of solidifying authoritarian regimes’ grip on power. In order to achieve
economic development while maintaining a balance
between state strength and basic freedoms, policy interventions must be carefully targeted.
Given the likelihood that local political elites might
resist change out of fear of losing their privileges,
and that growing resource demand by high-growth
economies in Asia diminishes action space for Western
donors, policy interventions might need to circumvent
local political elites. The focus will often need to be on
the private sector and civil society. Given the absence
of a commonly shared idea of community in many
fragile states, engagement with local power structures
and businesses might also offer donors broader impact
than an explicit focus on governments. Therefore a
two-pronged response that involves action both within
and outside fragile states is required.
IN FRAGILE STATES: PROMOTE TRANSPARENCY, ECONOMIC DIVERSIFICATION
AND CAPACITY-BUILDING
Donor policies towards fragile states can break the link
between resource wealth, governance failure and lack
of economic development by promoting transparency,
economic diversification and local capacities.
Transparency relating to resource management and
revenues can be increased by aiding the implementation of internationally recognized governance principles such as those set forth by Extractive Industries
Transparency Initiative (EITI). The implementation of
EITI principles follows the criteria listed below. Many
of the resource-dependent fragile states mentioned in
Table 1 are currently EITI candidate countries, and
their process towards EITI compliance is supported by
numerous donor countries, including Norway, the UK
and the Netherlands.
To ensure that increased transparency translates into
economic development, local capacity to manage resources must be improved. Ensuring that fragile states
are able to negotiate reasonable contracts with extraction companies and to set up a comprehensive tax regime that channels resource rents towards development
are two important places to start. Norway, for instance,
is facilitating capacity-building in these fields through
its Oil for Development initiative.
BOX 1: SELECTED EITI CRITERIA
•
•
•
•
Regular publication of all material oil, gas
and mining payments by companies to
governments and all material revenues
received by governments from oil, gas and
mining companies to a wide audience in
a publicly accessible, comprehensive and
comprehensible manner.
Where such audits do not already exist,
payments and revenues are the subject
of a credible, independent audit, applying
international auditing standards.
Civil society is actively engaged as a
participant in the design, monitoring and
evaluation of this process and contributes
towards public debate.
A public, financially sustainable work plan
for all the above is developed by the host
government, with assistance from the
international financial institutions where
required, including measurable targets, a
timetable for implementation, and an assessment of potential capacity constraints.
Source: www.eitransparency.org
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DIIS POLICY BRIEF
Finally, efforts to help fragile states diversify their
economies would prevent the resource curse from gaining a foothold. Most fragile states rely economically
on pure extraction, rather than processing, of natural
resources. An increased focus on value-added processing would create more local jobs and generate higher
export earnings. Moreover, such diversification would
improve the political and financial stability of fragile
states by shielding them from the price volatility of raw
material markets.
IN DONOR COUNTRIES: PROMOTE
INVESTMENT AND REMOVE OF TRADE
BARRIERS
Efforts in donor countries, or by donor countries in
multilateral settings, can go a long way towards helping
fragile states making the best of their resource endowments. In particular, questions relating to investments
made by multinational companies and international
trade regulation are more easily addressed by donors
than by fragile states.
Donors can help tighten control of illicit payments
and help ensure that companies abstain from using
bribery and other exploitive strategies. Moreover, donors could promote investment further in the risky
environments in fragile states. Investment is needed by
reputable companies that can be held accountable by
well-developed legal frameworks in donor states, and
perhaps by share-holder and CSR concerns too. This
would help crowd out companies that fail to live up
to reasonable standards of conduct and transparency.
Public agencies that offer financing and political risk
insurance for businesses that invest in developing countries could play a key role in this strategy.
Donor countries also need to do their part to ensure
that the transparency standards mentioned above take
hold. To put warring parties in fragile states out of business, certification of valuable natural resources should
be implemented more broadly. The Kimberley process
BOX 2: EXAMPLES OF MEAN OECD
TARIFFS ON RAW PROCESSED AND
UNPROCESSED RAW MATERIALS
Copper
Ore and concentrates, OECD average
tariff: 0
Copper-based heating and cooking apparatus,
OECD mean tariff imposed on MFN: 3.7%
Oil
Crude, OECD average tariff: 0
Woven fabrics of (oil-based) nylon/polyester,
OECD mean tariff imposed on MFN: 6.0%
Source: UNCTAD-TRAINS database.
MFN=Most Favored Nation
has already minimized trade in conflict diamonds, and
similar schemes could be created for other valuable
resources.
Finally, donors can push for international removal of
the tariffs and nontariff trade barriers that make local
processing of raw materials financially unviable.
Removing such trade barriers for processed raw materials would give fragile states incentives to build up
their own industries and increase exports. Along with
the other suggested policies, this would help minimize
the risk of fragile states falling prey to the resource
curse.
Steen Nordstrøm, research unit on
Defence and seurity
[email protected]
FURTHER READING:
Bannon, Ian, and Paul Collier, eds. 2003. Natural Resources and Violent Conflict. Washington D.C:
World Bank.
More on fragile situations: www.diis.dk/fragile
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